The Reserve Bank of India (RBI) has issued a warning to states that are considering reverting to the old pension scheme, stating that it poses a significant risk to the “subnational fiscal horizon” and would result in the accumulation of unfunded liabilities in the coming years. The warning is included in the RBI’s Report titled ‘State Finances: A Study of Budgets of 2022-23′. The Congress-ruled state of Himachal Pradesh recently announced that it will be reverting to the Dearness Allowance (DA) linked Old Pension Scheme (OPS). Additionally, the governments of Rajasthan, Chhattisgarh, and Jharkhand have also informed the central government and the Pension Fund Regulatory and Development Authority (PFRDA) about their decision to restart the OPS for their employees.
In 2004, the Union government introduced the National Pension System (NPS), a defined contribution pension scheme that replaced the old pension scheme. The RBI report states that “A major risk looming large on the subnational fiscal horizon is the likely reversion to the old pension scheme by some states. The annual saving in fiscal resources that this move entails is short-lived.” By postponing current expenses to the future, the report states that states risk the accumulation of unfunded pension liabilities in the coming years.
Under the old pension scheme, employees are entitled to a defined pension, which is equal to 50% of the last drawn salary. However, under the National Pension System (NPS), which has been in effect since 2004, the pension amount is contributory. Several economists have also expressed concern over the states’ decision to revert to the OPS, stating that it would put stress on states’ finances. Former Deputy Chairman of the erstwhile Planning Commission, Montek Singh Ahluwalia, recently spoke out against the move, calling it one of the biggest “revadis” (reverse migrations).
The RBI report also states that states have budgeted an increase in revenue spending, mainly led by non-developmental expenditure such as pension and administrative services. Budget allocations towards medical and public health and natural calamities have been lowered, while housing outlay has been increased. Committed expenditure, comprising interest payments, administrative services and pension, is expected to increase marginally from 2021-22 (RE), the report states.
In summary, the Reserve Bank of India (RBI) has warned states that are considering reverting to the old pension scheme, stating that it poses a significant risk to the “subnational fiscal horizon” and would result in the accumulation of unfunded liabilities in the coming years. The warning is included in the RBI’s Report titled ‘State Finances: A Study of Budgets of 2022-23’ and comes after several states announced their decision to revert to the Old Pension Scheme (OPS). The RBI report states that by postponing current expenses to the future, states risk the accumulation of unfunded pension liabilities in the coming years.
